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How to build a top-tier trading plan

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FX:USDJPY   U.S. Dollar / Japanese Yen
Hey everyone! 👋

Today, we will be looking at how to build an unstoppable trading plan in a few short steps.

While many successful traders often use different ‘variables’ when it comes to identifying trades, the core decision making process of all good trading plans remains mostly the same. Therefore, we’re going to go over a few key things that you shouldn’t be missing out on in your very own trading plan. Let’s get started 👇



Asset Selection 🏦🏦

All good trading plans need to define how they will select what assets they will be trading. For Futures and FX traders, this is a relatively straightforward process, as the universe of tradable symbols is small. However, for Equities and Crypto traders, the universe of tradable symbols is massive. How will you figure out which symbols present the most opportunity and the best risk/reward? Having a defined set of criteria for finding opportunities you’d like to trade is absolutely essential for maximizing your strategy’s expected value.

For example, a stock day trader might search for stocks gapping overnight more than 4%, on more than X amount of volume /shares traded. Or, a crypto swing trader might search for liquid cryptocurrencies with oversold or overbought conditions that could present a mean reversion opportunity.

No matter what the asset though, for traders, generally there are two key things to ensure you’re looking for:

Volatility
Liquidity ✅

If an asset doesn’t have enough liquidity, then it will be hard to scale in and out of bigger positions over time.

If an asset doesn’t have enough volatility , then it will be hard to generate absolute returns from the small trading range. This isn’t always the case, as a few options strategies look to profit off of low volatility , but for spot traders, it is absolutely essential.



Execution Logic 🧠🧠

Once you know what asset you’re looking to trade, the next step is to define what actually counts as a trading opportunity. Almost all assets move every day - what “setups” can you define for yourself that offer the best risk/reward?

The best trading plans have logic that reads like a decision tree, so the trader doesn’t have to think too hard in the moment about the process - all of the hard decisions have been made prior to the in-the-moment situation.


These decision trees can become infinitely complex, but as long as you create and are comfortable with your own execution logic, then you can follow it and improve it over time.

There are two important elements to account for when creating decision logic:

Direction ✅
Execution ✅

While some traders are comfortable taking trades in either direction, many traders are only comfortable with taking trades in one direction, because it can be easier to simplify what you’re looking for in a trade. Because of this, most funds and traders will look to come up with a “view” first.

For example: “I will only look for long trades when the asset is above its 20d moving average.”

OR

“If the ISM PMI is greater than 50, then I will only look to buy stocks.”

Then, once you know what direction you’re trading in (it can be both!), actually figuring out PRECISELY what gets you into and out of a trade becomes necessary.

For example: “If I am looking for a long entry in a trending asset, I will only buy at a 30d high, while setting my stop at a 30d low.”

Having both direction and execution helps to clarify exactly what counts as a trading opportunity, and what is simply a pattern that only exists in your head. It's also key to controlling your risk and getting you out of bad situations should they arise.



Cash Management 💵💵

Finding assets to trade and trading them according to a high-quality plan matters little if you lose everything in a single trade you were sized too large in. Because of this, the best trading plans account for risk and drawdown by planning for the worst-case scenario.

Common strategies to control risk center around sizing trades (to risk no more than 1-5% of your capital at any one time, for example) using theme limits, sector limits, and more. Risk is a decision you make on the way in, not on the way out.

When placing a trade, know ~exactly what you are risking, and how that fits into your overarching position management strategy. See this article for more details.



So, there you have it! 3 quick steps to building an unassailable trading plan ready for the punches the markets will throw your way.

Well, what are you waiting for? Get to work 😉

-Team TradingView ❤️

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